Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended April 30, 2008
Business Overview: Deere & Company manufactures and distributes agricultural equipment, commercial and consumer equipment, and construction and forestry equipment. It also provides financial services, including credit and crop insurance products.
Key Financial Metrics
| Metric (in millions) | Q2 2008 | Q2 2007 | 6 Months 2008 | 6 Months 2007 |
|---|---|---|---|---|
| Net Sales | $7,468.9 | $6,265.9 | $11,999.5 | $10,080.8 |
| Total Revenues | $8,096.7 | $6,882.5 | $13,297.8 | $11,307.6 |
| Net Income | $763.5 | $623.6 | $1,132.5 | $862.3 |
| Diluted EPS | $1.74 | $1.36 | $2.56 | $1.88 |
| Operating Profit (Equipment Ops) | $1,102.0 | $829.0 | $1,559.0 | $1,099.0 |
| Cash & Equivalents (End of Period) | $2,287.8 | $1,983.7 | $2,287.8 | $1,983.7 |
| Total Debt (Short + Long Term) | $23,169.3 | $21,085.3 | $23,169.3 | $21,085.3 |
Note: Total Debt calculated as Short-term borrowings ($10,417.3M) + Long-term borrowings ($12,752.0M) as of April 30, 2008.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% year-over-year for both the quarter and the six-month period. Total revenues rose 18%.
- Profitability: Net income increased 22% for the quarter and 31% for the six-month period. Operating profit for Equipment Operations surged 33% for the quarter and 42% for the six months.
- Segment Performance:
- Agricultural Equipment: Sales up 34% and operating profit up 61% (quarter) due to higher volumes and price realization.
- Commercial & Consumer: Sales up 8% (quarter); operating profit slightly up 3%.
- Construction & Forestry: Sales declined 7% due to housing market pressure; operating profit down 14%.
- Credit: Operating profit increased slightly (2% for quarter) driven by portfolio growth and crop insurance income.
- Cash Flow: Consolidated operating cash flow was negative $522.6 million for the six months ended April 30, 2008, compared to negative $159.7 million in the prior year. This was primarily due to seasonal increases in inventories and trade receivables.
Guidance, Outlook, and Risks
- Full Year 2008 Outlook:
- Equipment sales projected to increase ~20%.
- Net income forecast at approximately $2.2 billion.
- Agricultural equipment sales expected to rise ~35%.
- Construction and forestry sales expected to decline ~3%.
- Credit operations net income forecast at ~$350 million.
- Third Quarter 2008 Outlook: Net income expected in the range of $550 million to $575 million.
- Capital Actions: On May 28, 2008, the Board increased the quarterly dividend to $0.28 per share and authorized a new $5 billion share repurchase program.
- Risks and Contingencies:
- Raw Materials: Sharp rise in commodity prices (steel, rubber) and component availability (tires) pose cost and supply chain risks.
- Economic Conditions: Slowdown in the U.S. housing market negatively impacts construction equipment; credit market issues remain a concern.
- Legal: Unresolved legal actions regarding product liability (including asbestos), retail credit, and intellectual property exist, though management does not expect a material effect.
- Accounting Changes: Adoption of FASB Interpretation No. 48 resulted in a $48 million reduction to beginning retained earnings and a $238 million liability for unrecognized tax benefits.
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the $1.2 billion increase in inventories (primarily agricultural finished goods) and potential obsolescence risks if demand softens.
- Raw Material Costs: Monitor the impact of escalating steel and rubber prices on future gross margins, as price realization may not fully offset cost increases.
- Credit Portfolio Quality: Review the credit operations' leverage ratio (9.7 to 1) and provision for credit losses given the broader economic slowdown and sub-prime market concerns.
- Construction Segment Exposure: Assess the severity of the 7% sales decline in construction/forestry against the forecasted 3% full-year decline, given the housing market downturn.
- Cash Flow Dynamics: Analyze the negative operating cash flow of $523 million to ensure it is purely seasonal and not indicative of working capital inefficiencies.